Nick Mersch’s Top Picks for August 21, 2025

Nick Mersch, Portfolio Manager, Purpose Investments

Focus: Technology stocks

Top picks: Cloudflare, Microsoft, Nvidia

MARKET OUTLOOK:

The age of artificial intelligence (AI) is upon us. It is reorganizing how we work, how we think, and how we interact with the world around us. Old business plans need to be thrown out and redrawn with an AI-first approach in this new era. Incumbents will need to continually adapt or else they will fall victim to the innovators dilemma. Startups that are AI-native will flourish, similar to how cloud-native SaaS models replaced on-prem licensing. Without an AI strategy you will get left behind. In this theme, I like several core concepts:

Hyperscalers (Microsoft, Alphabet, Meta and Amazon): These are the Cloud technology platform that are powering the new revolution. These companies have significant cash balances in addition to strong free cash flow generation from enjoying decades of high margin monopoly-type business. They are now all-in on building out data centres so that they can power the infrastructure and application layer, leveraging data that they already clean, store, and analyze.

Semiconductors (Nvidia, Taiwan Semiconductor Manufacturing Company, Micron Technology, Broadcom): Semiconductor companies are selling the picks and shovels to go mine the resource. This renaissance does not exist without the foundation that Nvidia has laid by providing the compute layer

Supporting Infrastructure (Digital Realty Trust, Equinix, Vertiv Holdings, Dell Technologies): Racking systems within large concrete buildings need to be assembled in order to harness the compute capability. Plays in this area include DC REITS and component companies

Power (Vistra, Constellation Energy, Talen Energy): Once built, these data centre require vast amounts of electricity to operate. Data centre electricity consumption as a percentage of total consumption in the U.S. is projected to increase from three to 12 per cent. These companies provide that power.

Taken together, you need to invest in the entire stack in order to fully capture the AI wave. By spreading out along the entire value chain, you are fully participating in the most important revolution since the internet.

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TOP PICKS:

Cloudflare (NET NYSE)

Cloudflare is evolving from a content delivery network into a ‘connectivity cloud’ that unifies security, networking, and developer compute at the edge. It is positioned to capture three secular shifts: platform consolidation in security, AI inference moving closer to users, and serverless adoption.

Execution has re-accelerated: Second quarter fiscal year revenue rose 28 per cent to $512 million with non-GAAP (generally accepted accounting principles) operating margin at 14 per cent and free cash flow positive, while current remaining performance obligation grew 33 per cent (total RPO +39 per cent), improving near-term visibility.

Management raised this year’s fiscal year revenue guidance to $2.114 billion and ended the quarter with $4 billion in cash and securities, giving investment capacity without near-term balance-sheet strain. Enterprise mix continues to deepen customers spending >$100,000 now contribute 71 per cent of revenue, and large-deal momentum is improving net retention.

Strategically, workers (serverless), R2 (object storage with zero egress), durable objects/D1 (state), and AI products (workers AI, AI gateway, vectorize) create a high-margin, usage-based platform that can expand share of wallet and embed Cloudflare deeper into customer architectures.

The thesis is that as these building blocks are packaged and priced for enterprises. Cloudflare can compound at durable mid-20s growth while scaling operating leverage. Key catalysts over six to 12 months: continued RPO strength, broader global adjustment/pricing for AI/workers data services, and incremental zero trust and network-services consolidation wins.

Primary risks: a premium valuation that assumes sustained re-acceleration, competitive pressure from hyperscalers and best-of-breed vendors, and usage sensitivity if macro softens. Net-net, Cloudflare offers a rare combination of growth, expanding profitability, and a differentiated edge-native platform aligned with AI workloads—worthy of a core growth position for investors who can tolerate multiple volatility.

Microsoft (MSFT NASD)

Microsoft is the tech original reinvented as the industry’s AI arms dealer, selling the picks and shovels for the next decade of computing. It runs three engines that touch nearly every workflow: productivity and business processes (Office 365, LinkedIn, Dynamics), intelligent cloud (Azure, server products), and more personal computing (Windows, devices, gaming). Growth is led by Azure as customers shift data and AI workloads to Microsoft’s stack, while Office 365 and LinkedIn provide durable subscription cash flows and Windows has stabilized. Copilot across Microsoft 365, GitHub, and Windows pulls usage into Azure, and the OpenAI partnership keeps the company close to the frontier of model innovation.

Results underscore the thesis. This year’s fiscal year revenue reached $281.7 billion with $101.8 billion in net income, and trailing free cash flow of about $71.6 billion. The June quarter delivered $76.4 billion of revenue and roughly 45 per cent operating margin.

Management disclosed Azure at more than $75 billion in annual revenue, guided to another year of double-digit growth in next year’s fiscal year, and committed a record near $30 billion for AI infrastructure to meet demand. The stock reflects this leadership.

At roughly a $3.9 trillion market cap, Microsoft trades near 20 times forward enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) and about the mid-teens on forward EBITDA depending on estimates, a premium to history that implies confidence in AI-driven expansion.

Key watch items are sustained Azure growth, Copilot monetization, and returns on heavy capex. Risks include valuation sensitivity, potential AI pricing pressure, and regulatory scrutiny. Net, Microsoft remains the best placed scaled platform for enterprise AI adoption.

Nvidia (NVDA NASD)

Nvidia is the “pickaxe supplier” of the AI gold rush, with chips that power nearly every state-of-the-art model and earnings that reflect extraordinary demand. The company designs high-performance semiconductors, led by data centre graphics processing units (GPUs) for AI training and inference, plus networking from Mellanox InfiniBand and a sticky software stack built around compute unified device architecture (CUDA) and AI SDKs. Gaming, pro-visualization, and automotive are smaller but strategic.

The engine is AI. After ChatGPT ignited spending, data centre revenue surged from roughly $15 billion two years ago to about $105 billion in this year’s fiscal year, or roughly 80 per cent of total revenue of $130.5 billion. Architectural leadership with A100 and H100, coupled with CUDA lock-in and developer familiarity, keeps customers scaling on NVIDIA rather than switching.

Gross margins are exceptionally high, around 75 per cent GAAP in this year’s fiscal year, reflecting limited high-end competition and pricing power. Results have been historic.

Fourth quarter revenue for this year reached $39.3 billion, with data centre at $35.6 billion and full-year net income hit $72.9 billion. In May 2025, the company absorbed a $4.5 billion inventory write-down tied to new U.S. export controls on H20 chips to China, which highlighted geopolitical risk but did not derail the global growth trend, and now these are back on the table.

The April 2025 quarter was still up 69 per cent year over year excluding that charge. The next leg is the Blackwell generation, expected to extend performance and efficiency. The constraint remains supply, since output is limited by foundry and advanced packaging capacity at partners like TSMC.

In short, surging AI adoption, a mature software ecosystem, and scarce rivals give NVIDIA a privileged position at the centre of accelerated computing.